Short selling, also known as ‘shorting’ or ‘going short’, is a strategy that aims to benefit from falling market prices – like a company’s share price falling. The opposite’s also true – short sellers lose money when the price of the stock rises.
It’s a very risky strategy.
That’s because, in theory, share prices can rise to unlimited levels, meaning a short seller’s losses can be unlimited.
Because of the risks involved, it’s not something we offer on the Hargreaves Lansdown platform.
What could it mean if a stock has a big short position against it?
When a company has a large short position against them, it could indicate that there’s a serious issue at the company.
This could be for a variety of things like a large amount of debt to repay, the business being in a tough spot in the market cycle, or if there’s an ongoing scandal involving the company.
But in some cases, despite there being a short position against the company, there might still be an investment case.
Short positions can push down the company’s valuation. But if the shorted company can make it through whatever storm attracted the short sellers, there’s potential for a revaluation upwards.
We look at whether a change in fortunes could be in store for these three companies with significant short positions against them.
Remember, before you can trade US shares, you need to complete and return a W-8BEN form.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own. Past performance is not a guide to the future.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Cars.com
Cars.com is an online platform that efficiently connects buyers and sellers together. The group doesn’t get involved in the transactions or take ownership of the vehicles, which means it doesn’t need to tie up cash in inventory or worry about the risks of owning unsold vehicles.
Customers using its platform benefit from having access to a host of vehicle listings, background information, and over 13 million reviews. This gives them the information and confidence to transact through the platform, making it a go-to place for dealers to list their cars for sale.
By paying a subscription fee to advertise their cars on the platform, dealers get their listings put in front of 27 million high-intent customers each month. They also get access to tech and media products to help convert these car browsers into buyers.
Revenues have grown at mid-single-digit rates over each of the last three years, reaching $719mn in 2024. Cars.com’s subscription model brought in around 90% of this total, establishing a relatively sticky revenue stream from a diversified customer base.
Despite the positives, it’s easy to see why the ‘bears’ have been attracted to this one.
The auto industry is in a tough spot, and heightened volatility from tariffs has seen Cars.com suspend its $745-755mn full-year revenue guidance.
With so much uncertainty in the auto market, further setbacks can’t be ruled out. Consumer spending power is under a fair amount of pressure, and big-ticket items like a new car fall down their priority list when times get tough.
While these challenges shouldn’t be overlooked, we think the valuation’s been overly punished.
Cars.com’s asset-light model means revenues flow relatively easily down the income statement. So, despite the revenue setback, a tight grip on costs means operating profits are still expected to grow at double-digit rates this year.
The balance sheet is in reasonable shape, with debt levels towards the lower end of its target range. That should help the group ride out the storm in the near term. But there’s no guarantee on when the auto market will pick up again, so potential investors will need plenty of patience.
Molson Coors Beverage Co
Molson Coors is a giant in the beverage industry, with a host of well-known brands like Coors Light, Carling, Staropramen and Rekorderlig under its wing.
The group’s reach spans right across the globe, and it’s cemented its place as the second-largest brewer in its home country of the US.
Beyond beer, the group’s expanding into non-alcoholic drinks to help stay in tune with evolving customer tastes.
In line with this strategy, it recently bought a minority stake in premium mixer-maker, Fevertree, and the partnership will see Coors take over the production and distribution of Fevertree’s products in the US.
Given Fevertree’s penetration in the US is small relative to the size of the market, there’s a long runway for growth if both parties can execute well. However, it will take time and money for Coors to set up these new production facilities, and marketing spending’s ramping up to whet consumers’ appetite in the meantime. That’s currently weighing on cash flows as production’s not set to hit full flow until the new year.
At the same time, Coors has seen its sales drop 11% to $2.3bn in the first quarter due to a weak demand backdrop and a tough comparable period. That’s led the group to cut back its full-year guidance, which now points to a low single-digit drop in sales.
While we think margins could come under further pressure in the near term, we’re more positive on the long-term outlook.
The declines stem from struggling consumers who have chosen to drink less, rather than switch to other brands, meaning the group’s not lost market share to competitors.
Coors’ exposure to tariffs also looks limited relative to many of its peers. And with a host of strong brands in its portfolio, the group should be able to tap into its pricing power to boost profits when demand eventually picks back up.
These struggles appear to be priced into the valuation, which sits well below both the long-term average and that of peers. This could present an attractive entry point for investors who believe in the strength of the brand portfolio and Coors’ ability to adapt to changing consumer preferences.
However, we’re not expecting a quick turnaround, and investors should be prepared to stomach some volatility along the way.
Papa John’s International
Papa John’s probably needs less introduction than our other entries to this list.
The group’s been filling stomachs with tasty pizza since 1984, and has since expanded its operations to over 6,000 restaurants across more than 50 countries. Revenue of $500mn rang through the tills in the first quarter, broadly flat on the year before.
But operational performance has been disappointing in recent times, with profits falling over each of the last three years.
That’s prompted a transformation plan to help turn its fortunes around.
This includes improving its value offering and digital platforms, smarter marketing initiatives, and a sharper focus on delivering better customer experiences.
Many of the short sellers have likely been attracted by a lack of belief in this turnaround story.
Executing well on all of the above initiatives will be challenging, and there’s still a long way to go before a call can be made on whether it’s a success or not.
Then there’s the challenging macroenvironment.
Consumer spending’s coming under pressure, especially in Papa John’s home market of the US. As budgets get stretched, consumers are likely to become less willing to spend money on takeaways.
But it’s not all bad news.
There are some early signs that its transformation initiatives are starting to drive improvements, and recent results have largely been ahead of market expectations.
There have also been reports that private equity firms are considering a bid to take Papa John’s private for $2bn – around 20% above the current valuation. If accepted, that premium would fall into shareholders’ pockets.
However, we should caution that no concrete offer has been made yet. If this fails to materialise, then investor sentiment will be fully dependent on business performance.
All in, Papa John’s has a great brand and product. If management can deliver on the transformation plan, we think the group can return to profit growth next year. But nothing’s guaranteed and there’s likely to be plenty of ups and downs along the way.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.